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By the end of first year, Entity As estimate of contract costs has increased to $7200
million.
In the second year, ABC Company approves a variation resulting in an increase in
contract revenue of $400 million and estimated additional contract costs of $300
million.
For the third year, costs incurred include $200 million for standard materials stored at
the site to be used to complete the project.
Entity A determines the stage of completion of the contract by calculating the proportion that
contracts costs incurred for work performed to date bear to the latest estimated total contract
costs. A summary of the financial data during the construction period is as follows :
Year 1
Year 2
Year 3
$ million
8000
8000
2520
4700
7200
800
$ million
8000
400
8400
5975
1500
7500
900
$ million
8000
400
8400
7500
7500
900
A company will be able to recognise revenue over time only if the criteria specified in
IFRS 15 are met. In all other cases, a company will recognise revenue at the point in
time when the customer obtains control of the promised good or service.
A company is required to consider the effects of any significant financing components
in the determination of the transaction price (and thus the amount of revenue
recognized). This may affect long-term contracts in which payment by the customer
and performance of the company occur at significantly different times.
Solution:
1. The stage of completion of the contract by the end of Years 1, 2, and 3 :
First computation:
$ 5,975
$ 200 $ 5,775
($200 million is excluded from total cost incurred, because it is the material that will
be use for the year 3).
Second computation
After getting the estimated contract from the first computation, the next step is
determine the stage completion for the Year 2.
estimated contract cost incurred
total estimated contract cost
Total
Stage Completion
: $0.77 x 100% = 77 %
$ 5,775
$ 7,500 :
$ 0.77
Third computation:
Because the stage completion of Year 2 already found from the second computation,
we can also determine the stage completion for Year 1 and Year 3 in this step.
1. Year 3
On this year the percentage of stage completion is 100%. Because in this third year
the project is going to be done.
2. Year 2
On this year the percentage of stage completion is 77%. We already found it from the
second computation.
3. Year 1
Stage of completion for Year 1 = Year 3 Year 2
= 100% - 77%
= 23%
Year 1
Year 2
Year 3
$ million
8000
8000
2520
4700
7200
800
23%
$ million
8000
400
8400
5975
1500
7500
900
77%
$ million
8000
400
8400
7500
7500
900
100%
2. The amount of revenue expenses and profit for each of year 1, 2, and 3
in
million
years $ million
current
year
million
Year 1:
Revenue
$ 1,840
$ 1,840
$8,000 x 0.23
Expense
$ 1,656
$ 1,656
$7,200 x 0.23
Profit
$ 184
$ 184
Year 2:
Revenue
$ 6,468
$ 1,840
$ 4,628
$ 8,400 x 0.77
Expense
$ 5,775
$ 1,656
$ 4,119
$7,500 x 0.77
Profit
$ 693
$ 184
$ 509
Year 3:
Revenue
$ 8,400
$ 6,468
$ 1,932
$8,400 x 1.00
Expense
$ 7,500
$ 5,775
$ 1,725
$7,500 x 1.00
Profit
$ 900
$ 693
$ 207
3. The journal entries to account for the contract revenues and expenses for Year 1
Debit
To recognise the contract expenses for Year 1
Contract expenses
$1,656
Cash or accounts payable
To recognize the revenue of contract for Year 1
Cash or due from customer
$1,840
Contract revenue
Credit
$1,656
$1,840